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  • Gold registered losses for the third straight week despite Friday's rebound.
  • Additional recovery gains could be witnessed as long as $1,700 support holds.
  • Investors will pay close attention to US PMI data and ECB policy announcements.

Gold started the week in a relatively calm manner but came under strong bearish pressure following Monday’s choppy action. With the dollar continuing to gather strength on risk-aversion and hawkish Fed bets, gold slumped below $1,700 for the first time since late July on Thursday before snapping a three-day losing streak on Friday. Nevertheless, the pair closed the third straight week in negative territory. Next week's economic calendar will not be offering any high-tier data releases and investors could wait for technical breakouts. 

What happened last week?

In the absence of high-impact macroeconomic data releases on Monday, gold fluctuated in a tight range and closed the first day of the week virtually unchanged. The negative shift witnessed in risk sentiment, however, helped the dollar continue to outperform its rivals and didn’t allow XAU/USD to stage a rebound.

Reports of China tightening coronavirus-related restrictions in Shenzen revived concerns over gold’s demand outlook and further weighed on the price. On Tuesday, the data from the US revealed that the Conference Board’s Consumer Confidence Index improved to 103.2 in August from 95.3 in July. Although this print surpassed the market expectation, it failed to trigger a risk rally.

Automatic Data Processing (ADP) reported mid-week that employment in the US private sector rose by 132,000 in August, compared to the market expectation of 288,000. The initial market reaction caused the greenback to lose some interest but the wage inflation component of the report showed that the year-over-year change in annual pay was 7.6% in August, helping the currency limit its losses and making it difficult for XAU/USD to gain traction.

On Thursday, safe-haven flows continued to dominate the markets with China announcing a lockdown of the southwestern Chinese metropolis of Chengdu, where 21.2 million reside. Later in the day, upbeat data releases from the US provided a boost to the USD and caused gold to fall to its lowest level in over a month below $1,690. 

The ISM’s August Manufacturing PMI survey showed that the business activity in the manufacturing sector continued to expand at a robust pace in August. More importantly, the Employment Index component climbed to 54.2 from 49.9 in July, reviving hopes for a strong Nonfarm Payrolls data following the disappointing ADP report. The sharp decline seen in the Prices Paid Index of the survey failed to derail the dollar and the US Dollar Index reached its strongest level in two decades at 109.98. Meanwhile, the benchmark 10-year US Treasury bond yield advanced beyond 2% with the CME Group’s FedWatch Tool pointing to a 75% probability of a 75 basis points rate hike in September.

The US Bureau of Labor Statistics (BLS) announced on Friday that Nonfarm Payrolls rose by 315,000 in August, surpassing the market consensus of 300,000. Further details of the publication showed that the Unemployment Rate edged higher to 3.7% with the Labor Force Participation Rate improving to 62.4% from 62.1% in July and the annual wage inflation remained steady at 5.2%. The 10-year US T-bond yield fell nearly 2% after the jobs report and helped gold reclaim $1,700 ahead of the weekend.  

Next week

The US markets will be closed due to the Labor Day holiday on Monday and as such market action is likely to remain subdued. In the early trading hours of the Asian session on Tuesday, the Caixin Services PMI data from China will be watched closely by market participants. A reading below 50 could remind investors of the slowdown in the world’s second-biggest economy and hurt gold. On the other hand, an unexpected improvement in the data could help the market mood improve, providing relief for the precious metal.

On Wednesday, the ISM will release the August Services PMI report for August. Markets paid close attention to the headline PMI and the Employment Index component of the ISM’s Manufacturing PMI and a similar reaction could be witnessed. Analysts forecast the ISM Services PMI to edge lower to 54.5 in August. The Employment Index, which stood at 49.1 in July, could weigh on the greenback if it stays below 50 for the third straight month. FOMC Chairman Jerome Powell is scheduled to deliver a speech at 1310 GMT on Wednesday as well.

The European Central Bank (ECB) will announce its interest rate decision on Thursday. In the past week, ECB officials voiced their willingness to consider a 75 bps rate hike. With the euro area inflation continuing to rise amid the ongoing energy crisis, the ECB could opt to deliver a hawkish message. In that scenario, the shared currency could capture some of the capital outflows from the dollar. It’s worth noting, however, that a hawkish ECB message could trigger a leg lower in the XAU/EUR pair. Even if the dollar were to lose interest after the ECB event, gold could find it hard to gather bullish momentum depending on XAU/EUR’s reaction.

There won’t be any high-tier macroeconomic data releases on Friday and the risk perception alongside the action in US Treasury bond yields could impact gold’s valuation ahead of the weekend.

Gold technical outlook

The Relative Strength Index (RSI) indicator turned north and recovered to 40 after testing 30 on Thursday. This technical development suggests that gold could extend its upward correction in the near term. On the upside, the 20-day and the 50-day SMAs form an important resistance area at $1,750. A daily close above that hurdle could open the door for an extended rebound toward $1,780 (Fibonacci 23.6% retracement of the latest downtrend) and $1,800 (psychological level, 100-day SMA).

$1,700 (psychological level, end-point of the latest downtrend) aligns as significant support. In case XAU/USD falls below that level again and confirms it as resistance, it could target $1,680 (July 21 low).

Gold sentiment poll

Following this week's action, experts expect gold to continue to fall next week with the FXStreet Forecast Poll pointing to an overwhelmingly bearish outlook on the one-week view. The one-month outlook paints a mixed picture but the average target sits at $1,690.

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